DreamWorks Animation's Desperation Move

With zero fanfare today, execs for DreamWorks Animation and its new distributor Twentieth Century Fox announced DWA’s 2013-2016 slate which includes 12 CG animated films in 4 years. That, the execs say, is a major industry first. What they’re not saying is that it also seems like a desperation move for this public company. Wall Street is, to put it generously, skeptical about DreamWorks Animation’s prospects. Of the 13 analysts who follow the company according to Thomson/First Call data, only one has a “buy” recommendation. Seven rate it a “hold”. And five designate it either “underperform” or “sell”. The stock is up 5.8% so far this year but that’s lousy since NASDAQ where DWA trades is up 20.4%. And over the last 12 months DreamWorks Animation is down 5.4% while NASDAQ is up 27.1%.

The basic problem for DreamWorks is that its business model appears to be crumbling. One major concern is that Jeffrey Katzenberg‘s formula of making parodies of movie genres as well as sequel after spinoff has run its course – and the new slate looks like more of the same. (As opposed to Pixar’s boundless creativity.) Competition is growing in computer animation not just from Pixar but from Illumination Entertainment and Blue Sky Studios and so on. DVD sales for family fare are declining at an alarming pace. 3D didn’t live up to anyone’s expectations even though Katzenberg negotiated with exhibitors for its exorbitant pricetag. (Yes, consumers, he’s to blame.) Production costs keep rising. Merchandise sales for recent movies including Madagascar 3 were disappointing. Live shows are only so-so. (DWA took a $5M impairment charge for Shrek The Musical). And so on.

Which were just some of the reasons why Time Warner, Comcast, and the Walt Disney Co weren’t interested in buying DreamWorks Animation when Katzenberg thought it would be a slam dunk deal. In truth, those moguls didn’t want Katzenberg in the fold. He came into Universal and then Paramount and arrogantly upended their home entertainment divisions. And it’s well known that he thinks he should be a Big Mogul inside Big Media and not on the outside with his nose pressed to the glass looking in and trying to suck the air out. The moguls still remember how, right after Tom Freston was fired at Viacom in 2006, David Geffen called up Sumner Redstone suggesting that the Viacom octogenarian hire Katzenberg to run the whole she-bang. (Redstone said, “Forget it.”) When I asked Katzenberg about his inexhaustible ambition during the phone conference announcing the DWA-Fox deal in August, there was uncomfortable silence. Then he said he was “now very old” and joked “I don’t suck air anymore”.

It came down to only Sony and Fox becoming DWA’s latest Hollywood distributor after Katzenberg decided to exit Paramount for reasons still not clear because the studio did a good job. Sony was in talks. But Katzenberg spent time with Wendi Murdoch and, suddenly, the Fox deal was made. Lazard Capital Markets’ Barton Crockett considers Fox a strong partner but notes: “At one point, a bull argument was that talks for a new distributor could prompt a conglomerate to buy DreamWorks. That investor hope had faded, and is now gone.“

Analysts by and large were glad to see the company land a distribution deal, but along with Hollywood were unimpressed with the economics. Dreamworks agreed to pay Fox 8% for most distribution – the same as what it paid Paramount – and 6% for VOD, and digital rental and sales. DreamWorks will distribute its own domestic TV shows. Cowen and Co’s Doug Creutz says that the Fox deal “will not significantly change DWA’s per film economics” – and lowered his earnings per share estimate for fiscal 2012 to 90 cents from $1.12. Lazard Capital Markets’ Barton Crockett also cut his earnings forecast, calling the deal “slightly light” for Dreamworks. And Janney Capital Markets’ Tony Wible says the Fox deal – while good for DWA — “may be a disappointment to some bulls expecting cost savings from self-distribution or better terms.”

Even Katzenberg’s efforts to build ‘Dream Center’ Park in Shanghai with China partners are dismissed by those who know that film landscape as unrealistic and unlikely. His big talk about creating a DreamWorks channel has no specifics. Meanwhile the company rises or falls on the performance of just a few films anually.